Dependents provided for?

Ensure they can benefit from your pension.

In life, as Benjamin Franklin once said, the only things you can be sure about are death and taxes. For many people with personal pensions, the one sure thing about death is the hardship it will create for those they leave behind.

Their dependents will discover after their death that the only payouts they are entitled to from policies into which payments have been made for years is a return of the premiums paid in. In many other cases all they will get back is contributions plus either 4 or 6 per cent, depending on the pension plan they were sold.

Roddy Kohn, a financial adviser at Bristol-based Kohn Kougar, says: "When you are in your 30s and 40s, sudden death is the last thing on your mind. In fact, it is is not as rare as all that."

Out of 1,000 people aged 35, about 60 will have died within 20 years. Of the same number of people who reach the age of 40, just over 100 will die before they reach 60.

The difference in the amount paid can be massive. Equitable Life, a top insurer, calculates that on contributions of pounds 1,000 each year for 20 years the payout would reach pounds 30,969, assuming annual returns of 4 per cent. This rises to pounds 38,993 if interest of 6 per cent is added.

But with Equitable Life, pounds 20,000 invested over the same period would have delivered returns of more than pounds 128,000.

Throughout most of the 1980s, the majority of pension providers offered contracts where premiums, alone or at very low interest, were returned. This changed after 1988, when the Government permitted wider sales of personal pensions.

Ian Naismith, pensions strategy manager at Commercial Union, says change often came through fear of bad publicity.

"Originally, if you wanted to provide for your dependents after your death, you did so separately through life cover," he explains.

"Then people started to say that insurance companies are profiting from those who die. It was quite difficult to argue with someone who was bereaved."

All Commercial Union contracts since 1984 return all a policyholder's funds at death. The company also granted the same terms to those with earlier plans.

Equitable Life does the same. Nigel Webb, a manager there, says: "We decided it was grossly unfair that dependents were denied the full fund and retrospectively placed all our policyholders on the new terms. We meet the cost of doing so ourselves."

The cost can be expensive. Estimates range from 0.5 per cent of a fund's value on a pension taken out over 10 years, to 3.5 per cent for 25-year policies. This is because someone has to pick up the tab for effectively adding a slab of insurance to the contract.

Not all insurers are keen to shoulder this burden. Peter Byrne, individual pensions product manager at NPI, another pensions provider, says: "We don't do it automatically. We give the option to the member and remind them in regular mailings, reminding them of the downside of changing over."

With NPI, anyone wanting to switch can do so, but must meet the cost themselves. Where companies still refuse to return all funds to dependents, one option is to transfer the pension fund to a new provider.

But Mr Kohn warns: "The old-style pension did have certain benefits, such as the right to a larger tax-free lump sum at retirement.

"Also, there is no contributions limit on them."

High transfer charges could also carve a large slice out of the fund's value.

Nor does Mr Kohn always recommend paying more to gain the extra benefits: "It can sometimes be too expensive. My advice is that if you want to protect the likely return of your fund, consider separate insurance instead."

Mike Chelton is managing director of CSM Impact, a web-offset print firm in Basingstoke. His pension, started 10 years ago, was caught in the same trap.

"I did not fully understand the rules at the time and when I spoke to Roddy it was very enlightening," he says. Mr Chelton, who is 50 and hopes to retire before 60, only needed term assurance for a few years.

Mr Kohn points out that a 10-year term policy for someone aged 50 which pays pounds 100,000 in the event of death, would only cost pounds 53 a month, before full tax relief. A 40-year old male would pay pounds 32 a month for 20 years' cover, before relief.

"That way, he saves some money, while having the reassurance of knowing his family will still be protected if he dies. It's a belt and braces approach and could be unnecessary if you have provided for dependents by other means. But it can sometimes be best to be careful."

The Independent has produced a comprehensive 52-page `Guide to Pensions Planning', sponsored by Equitable Life, which explains everything you need to know about retirement planning. For your free copy, please call 0800 137372 or fill out the coupon on page 30.